TERM: FIRST TERM

SUBJECT: FINANCIAL ACCOUNTING

CLASS: SS 1

WEEK SIX AND SEVEN

TOPIC: BALANCING OFF LEDGER ACCOUNTS

CONTENT

Balancing Ledger Accounts

The Divisions of the Ledger
Extraction of the Trial Balance

NOTES

At the end of the month (or year or at some other convenient intervals), it is usual to balance
the ledger accounts that are kept by the business. The balance of each ledger account is the
difference between the two sides of the account and it represents the amount which is left in
that account.

The steps necessary to balance a ledger account are summarized as follows:

1. Using a calculator, add-up each side of the account and find the difference between the
total of the two sides.
2. Enter this difference on the next available line on the side with the smaller total. Enter the
date (usually the last day of the month) in the date column and the word “Balance” in the
details column. It is usual to insert “c/d” in the folio column. This is the abbreviation for
“carried down” and indicates where the double entry for this item will be made.

1. Now total each side of the account. This is done by drawing total lines and inserting the
total figure between the lines. It is usual to show a single line above the total and a double
line below the total. The totals of an account must be on the same level and must be the
same figure.

1. Make the double entry for the balance carried down. On the line below the totals, write the
amount of the balance on the opposite side to where the words “Balance c/d” were
written. Enter the data (usually the first day of the next month) in the date column and the
word “Balance” in the details column. It is usual to insert “b/d” in the folio column. This is
the abbreviation for “brought down” and indicates where the double entry for this item was
made

Illustration: Using the Cash Account prepared in Week 4 – 5.

Cash Account

2016 N 2016 N
July July
Capital 50,000 Purchases 8,500
1 3
July July
Sales 14,000 K. Nasiru 9,600
10 24
July
Fittings 6,000
27
Balance
39,900
C/D
64,000 64,000
August
1
39,900
Balance
C/D

NB: (a) If the total of the debit entries exceeds the total of the credit entries the account is said
to have a debit balance.

(b) If the total of the credit entries exceeds the total of the debit entries, the account is said to
have a credit balance.

EVALUATION

Business Accounting 1 Exercise 3.11 A

The Sub – Divisions of the Ledger

As a business grows, the volume of transactions increase and the number of ledger accounts
required to keep the financial records increase. It will therefore be necessary to divide the
ledger into different sections.

Dividing the ledger into sections makes it more convenient to use as the same type of accounts
can be kept together and the task of maintaining the ledger can be divided between several
people. The ledger is usually divided into the following specialized areas:

Cash Book – i.e. the main Cash Book and the Petty Cash Book

Sales Ledger – This is also referred to as the Debtors Ledger. All the personal accounts of
debtors (credit customers) are kept in the sales ledger
 Purchases Ledger – This is also referred to as the Creditors Ledger. All the personal
accounts of creditors (credit suppliers) are kept in the Purchases Ledger

General Ledger (or Nominal Ledger) – Apart from the Cash account, the bank account and
the accounts of debtors and creditors, all the remaining accounts are kept in the General
Ledger. This ledger will contain accounts of assets, liabilities, expenses, incomes, sales,
purchases and returns. Asset accounts are known as real accounts. Accounts for
expenses, income, gains and losses are known as nominal accounts.

The above classifications of the ledger must be reflected when transactions are recorded in the
ledger using the double entry principle.

EVALUATION

1. What is a ledger?
2. List and explain three classifications of the ledger.
3. List six accounts found in the nominal ledger.

Extraction of the Trial Balance

Resulting from the operation of the double entry system it is obvious that the total amount of all
the debit entries made in the books should equal the total of all the credit entries. To check if
the two sides of the books balance, a Trial Balance may be drawn up periodically.

A Trial Balance is a list of the balances on the accounts in the ledger at a certain date. A trial
balance is prepared to check the arithmetical accuracy of the double entry bookkeeping. The
name of each account is listed in the trial balance. The balance on each account is shown
according to whether it is a debit balance or a credit balance. The trial balance will show if the
total of the debit balances is equal to the total credit balances.

It is important to remember that the trial balance is not a part of the double entry system of
book-keeping as it is simply a list of balances. If the ledger accounts are balanced monthly then
a trial balance may also be draw up at the end of each month.

The trial balance should be headed with the title “Trial Balance as at ………” along with the date
on which it was prepared

Illustration: Using the ledger accounts prepared in week 4 – 5:

F. Sanusi:

Trial Balance as at 31st July, 2016

 Dr Cr
N N
Cash 39,000
Capital 50,000
Purchases 38,100
Sales 41,000
Returns
7,000
Outwards
Sundry
13,000
Creditors
Sundry
24,000
Debtos
Returns
3,000
Inwards
Fittings 6,000
111,000 111,000

From the above, it can be seen that the totals of the debit column of the trial balance agrees
with the total of the credit column. This indicates that the double entry bookkeeping is
arithmetically correct.

In practice, a trial balance is drawn – up using the actual ledger accounts.

However, in examination questions this does not always occur. Sometimes, students are
presented with a list of balances and asked to prepare a trial balance. Sometimes, a trial
balance containing errors is presented and students are asked to prepare a corrected trial
balance. In these situation, students cannot look at the ledger account in order to determine
whether the account has a debit or a credit balance. It is necessary to know the type of
accounts which have a debit balance and those which have a credit balance.

The table below will be useful in this regard:

Debit Balance Credit Balances

Assets Liabilities
Expenses Income
Drawings Capital
Purchases Sales
Returns
Returns Inwards
Outwards

EVALUATION

Simplified and Amplified Financial Accounting Exercise 7, 8x and 9.

READING ASSIGNMENT

1. Simplified and Amplified financial Accounting page 80 – 94

2. Business Accounting 1 page 37 – 48

GENERAL EVALUATION QUESTIONS

1. What is a Trial Balance?

2. Give the format of a Trial Balance with ten items.

Explain the purpose of the Trial Balance.

Explain the principle of double entry system.

State four differences between the ledger and the journal.

WEEKEND ASSIGNMENT

1. The purchase of a typewriter for office use for N65, 000 should be debited to A. bank
account B. purchases account C. cash account D. equipment account
2. Carriage inwards are incurred on goods A. on display B. sold C. purchased D. on
return
3. Returns inwards is also called A. carriage inwards B. carriage outwards C. purchases
returns D. sales returns
4. Which of the following accounts will have a credit balance? A. purchases account B.
returns account C. returns outwards account D. drawings account
5. An account is said to have a debit balance because A. the first entry made in it is on the
debit side B. there are more entries on the debit side than on the credit side C. total
value of debit entries is more than total value of credit entries D. there is no entry at all on
the debit side

THEORY

1. List four features of the ledger.

2. List and explain three classifications of the ledger.